New rules set to enter UK law later this year could have far-reaching implications for trials and prosecutions in cases of corporate criminality. Embedded in the Crime and Courts Bill is a provision that would lead to the introduction of a tool long used in the US to resolve complex cases of corporate criminality without the need for a costly and long drawn-out trial.

Swift justice: legal provision means complex cases can be handled without a costly and lengthy trial

Such arrangements, known as deferred prosecution agreements, became a feature of US investigations into corporate criminality around 2004, with cases “exploding” from 2007, according to one former US prosecutor. They were conceived as a means of swiftly and proportionately settling low-level criminality by individuals.

In the US, they allow prosecutors to stop short of a full trial, provided the potential defendant – either a company or individual – admits wrongdoing and agrees remedial action as well as the payment of any fines. Prosecuting bodies include the Department of Justice and the Securities and Exchange Commission. Should the defendant lapse within a prescribed period – usually two to five years – they can be prosecuted both for the original crime and the later wrongdoing.

John Wood, a partner in the litigation department at US law firm Hughes Hubbard who also served as an attorney in the DoJ, said: “It’s a way of getting a resolution where the company has to take responsibility and pay a fine but without the enormous reputational harm that comes along with an indictment and without the tremendous use of resources that would go along with going to trial.”

-- The directing mind

The UK’s version of deferred prosecution agreements will differ from the US version in several ways. First, judges will decide whether an agreement is “in the interests of justice”, unlike in the US where the agreements are simply a bilateral agreement between prosecutors and potential defendants.

Second, whereas they are frequently used in the US by companies that have uncovered wrongdoing of which senior management was unaware, UK companies will only be liable if it can be established that management is culpable. This is due to the identification principle in UK law, which requires that corporate criminal liability can only be established if the “directing mind” of a company was sufficiently aware of the crime. A directing mind is someone sufficiently senior to be “identified as the embodiment of the company itself”, usually a board member.

This could limit DPAs’ application in current high-profile cases involving investment banks where management responsibility has not yet been or cannot be established. Andrew Oldland QC, a former Serious Fraud Office prosecutor at the solicitor Michelmores, said the need to identify board culpability meant that corporate prosecutions and, by extension, DPAs might not be relevant for cases of Libor manipulation.

He said: “The difficulty for legal advisers of companies is that, yes, there might have been wrongdoing but it may not have been known about at the highest level. It’s going to be very difficult for prosecutors to prove to the criminal standard that the directing minds of those banks were complicit in offending.”
Patrick Doris, a partner in the dispute resolution group at Gibson, Dunn & Crutcher’s London office, agreed that the use of DPAs in Libor cases was unlikely.

He said: “Given recent events in the investment banking world, it’s conceivable that they may be potential early candidates [for the use of DPAs], but only where there’s a really strong case for criminal liability of the bank itself, rather than individual employees.”

While most of the detail on Libor manipulation available currently only relates to staff at a relatively junior level, reports emerged last week that John Varley, former chief executive and a member of the board of Barlcays, has been named in litigation on the issue, potentially paving the way for a corporate prosecution of the bank.

But even without this, Edward Garnier QC MP, the former Solicitor General who framed the forthcoming legislation on DPAs, said companies’ legal advisers should be less quick to draw conclusions about the legislation’s limitations, and that in the fullness of time it could have more wide-ranging use. He said he could foresee a time when they could be used in Libor-related cases: “Agreements can be useful when a company just wants to clear the decks and get on. The public wants something to be done on Libor and DPAs could be a part of that.”

Garnier also said that his original conception of DPAs encompassed their application to individuals, an eventuality that he believes could yet result, but that he took a conservative approach to the Bill. He said: “I didn’t think the parliamentary system could digest too much at one time.”

-- A long-term view

Garnier champions a reform to UK law more broadly on criminal liability for corporations, specifically the identification principle. He said: “It’s based on the Victorian notion that companies are small and not composed of hundreds of thousands of employees. The directing mind principle does not work when you have those numbers and that’s a reason why the SFO has not convicted many companies of fraud.”

While he doesn’t foresee an imminent change, on the grounds that “Parliament doesn’t like new ideas and Whitehall even less”, one corporate lawyer believes that reform will eventually happen, immediately making DPAs much more relevant to Libor. He said: “I think at some point it will happen, especially if the current baying for the banks continues.”

-- Done deals

HSBC and Standard Chartered both took advantage of deferred prosecution agreements last year when they were found to have violated US rules on money laundering and trade sanctions.

In addition to a fine of $1.256bn for HSBC and $327m for Standard Chartered, both had to submit to onerous measures ensuring that their wrongdoing would not recur.

Standard Chartered agreed to change its compliance procedures and to provide data and documents to US authorities on demand for the duration of its two-year agreement, while HSBC agreed to change its anti-money-laundering procedures and management structure globally, clawing back some deferred bonuses and partially deferring other compensation payments for the duration of its five-year agreement.

Shane Gleghorn, head of financial disputes at law firm Taylor Wessing, said: “[DPAs] can and do change behaviour. Look at what HSBC and Standard Chartered have had to do with the deals they’ve cut in the US. The news that’s slightly gone under the radar, because the fines take all the headlines, is that they’ve had to accept measures like independent inspectors reviewing their compliance systems and board members forgoing bonuses.

“It’s a big thing to have a regulator’s inspector sitting in your bank and looking at how you’re complying with your regulatory obligations.”

Judith Seddon, director of business crime and regulatory enforcement at law firm Clifford Chance, said the use of DPAs was an “important middle ground” between prosecution and choosing not to pursue a case at all.

She said: “It’s given the Department of Justice a lot of power. The fear factor they can use through this tool has assisted in getting corporates to enter into these agreements, some of them on fairly onerous terms.”

She expects similar activity in the UK. She said: “We know that [the Serious Fraud Office] is looking at banks alongside other financial institutions and corporate entities.”